A 3-Step Solution For Fixing Cyprus That's Far More Elegant Than The Current Plan

Cyprus is currently scheduled to vote on its bailout/bank haircut
plan, and right now it's not clear if anything can pass that
would allow the country to recapitalize its banks and prevent a
financial collapse.

Via
Felix Salmon, sovereign restructuring experts Lee Bucheit
(lawyer at Cleary) and C. Mitu Gulati (a professor at Duke) have
produced a short 3-page paper titled Walking
Back From Cyprus, which proposes a more elegant solution in 3
steps, which are:

1. All insured depositors to be protected. Indeed, the public
announcement of the bailout package would liberally sprinkle
adjectives such as “sacred” and “inviolable” in front of the
words “insured deposits” wherever they appear.

2. Holders of deposits in excess of the insured €100,000 minimum
would receive, at par, interest-bearing bank certificates of
deposit for those excess amounts. Depositors would be given the
option of taking CDs of, say, five or ten years’ duration, with
differing interest rates designed to encourage a longer stretch
out. Also, to encourage a takeup of the longer dated CDs, the
Government could offer a limited recourse guarantee on the
ten-year CDs benefiting from a pledge of a portion of the Cypriot
gas revenues that should come on line when those CDs mature.
The CDs would be freely tradable and liquid in the hands
of the holders.

3. The maturity dates of all sovereign bonds would be extended by
a fixed number of years, let’s say five years. By our reckoning,
this would reduce the total amount of the required official
sector bailout funding during a three-year program period by
about €6.6 billion.

So there's no confiscation. But money would be converted to CDs,
which would have a net-present value that's less than the current
amount. That would still be painful, but it wouldn't feel like
such a violation. And it would raise plenty of money.